Voluntary Disclosure Systems (VDS) have become viable tax compliance tools by tax authorities to curb evasion globally.
The creation of allowances in tax and anti-money-laundering compliance is a common practice in every jurisdiction. This permissive regulatory approach is deeply rooted in the idea that law is made for man and not man for law. Business efficacy has become a watchword for taxation and other corporate regulatory mechanisms leading to the devising of measures which either eliminate burdens detrimental to business efficacy or the reduction of the said burdens. To avoid speaking in parables, one vital tool employed across the globe as regards the reduction of tax burdens are Voluntary Disclosure Systems (VDS) or Voluntary Disclosure Programs (VDPs).
VDPs have gained popularity with tax authorities globally as a viable enticement to correct previous tax evasion and the adoption of VDPs has surged in recent times due to the sporadic increase in short-term revenue needs of numerous countries.i This surge motivates this article.
This article first discusses the concept of VDPs/VDS as viable tax compliance tools which creates a win-win situation for tax authorities and taxpayers. The article then provides necessary information on the Malaysian and Canadian VDPs and proceeds to compare both systems, before concluding.
A Voluntary Disclosure System/Program is designed to improve tax compliance and to reduce the exposure of taxpayers to penalties arising from default
VDPs are tax compliance tools used to incentivize the payment of taxes by foregoing criminal prosecution, eliminating penalties and potentially reducing interests to be paid by non-compliant tax payers.ii The reduction and elimination of interests and penalties are to reduce liability which a taxpayer may have to fulfil if no form of VDP exists.iii By exempting tax prosecution and reducing the tax liabilities and accumulated interest, as well as the elimination of penalties faced by tax payers who participate in VDPs, these tax payers are encouraged to voluntarily declare their liability and pay what is due after the submission of the voluntary disclosure. This is a win-win situation for both tax payers on one hand and the tax authorities on the other hand. VDPs serve as overarching compliance improvement strategies employed, with a consideration for other governance arrangements and reporting requirements such as compliance with Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT) standards.iv
Additionally, the AML/CFT component requires foreign investors to provide information on origin and source of wealth and funds, thus broadening the income tax base by increasing the taxes on earnings reported from offshore investment portfolios.v VDPs are different from tax amnesties, although both mechanisms are created to incentivize delinquent taxpayers to adjust their tax affairs within a specific timeframe in exchange for some degree of immunity from legal prosecution,vi VDPs do not have the effect of waiving all the remission of assets and income arising from undeclared income and assets.
Simply speaking, VDPs, when combined with other efficient enforcement frameworks, can extend to punishing future non-compliance by tax authorities. From the long list of countries which have adopted VDPs, the Malaysian and Canadian systems will be discussed and compared below.
The Malaysian Voluntary Disclosure and Amnesty Programme (VA) is a two-fold programme which applies only to indirect taxes
The 2022 Budget passed by the Malaysian Government on 29th of October 2021 signalled the beginning of the indirect tax special Voluntary Disclosure Programme.vii This highly anticipated scheme was then followed by the Guidelines on the Voluntary Disclosure and Amnesty Programme (VA) issued by the Royal Malaysian Custom Department (RMCD). The VA covers import duty, export duty, excise duty, sales tax, service tax, goods and services tax (GST), tourism tax and departure levy.viii
Through the VA, tax payers can approach the RMCD to voluntarily disclose unreported taxes or duties with up to a 100% remission of penalty plus potential tax remission.ix This is a system thought to be highly beneficial to the Malaysian Government as a means of increasing tax revenue without incurring the cost associated with enforcement issues such as contentious audits, litigation and criminal proceedings.
As implied by the name, it does not only cover disclosures, but also includes an amnesty programme. The VA is two-phased: the first phase was slated to run from 1st January to 30th June 2022, and entails a 100% penalty remission and 10%, 20% and 30% tax remission; while the second phase was slated to run from 1st July to 30th September 2022, which entails a 50% penalty remission and 5%, 10% and 15% tax remission.x These benefits apply to taxes, duties, levies and surcharges incurred before 31st October 2021, unless under investigation by the Enforcement Division.xi
It must however be noted that the Malaysian VA is not a tool to save tax payers caught up in forms of tax fraud. The programme extends to the following cases:
- Omission to charge and collect taxes;
- Omission to account for imported taxable services;
- Disclosure arising from transfer pricing adjustments, especially for import duties and sales tax;
- Late registration and payment for indirect taxes;
- Non-compliance with conditions for tax and duties exemption;
- Errors found during internal health check;
- Under-reporting of taxes and duties which were missed out in due to inaccurate classification; and
- Underpayment for GST.xii
The Canada Revenue Agency (CRA) established the Canadian Voluntary Disclosure Program (VDP) which applies to both direct and indirect taxes
Similarly, the Canada Revenue Agency (CRA) created a Voluntary Disclosure Program (VDP) to reintegrate tax defaulters into the tax system and to reduce the interests and penalties, as well as remove chances of criminal prosecution.xiii The Canadian Minister of National Revenue (The Minister) has the discretionary authority to grant such a relief from any penalty or interest by virtue of subsection 220 (3.1) of the Income Tax Act (ITA).
The scheme was amended in 2018 to create two tracks; the General Program which covers a wider range of compliance issues and entitles the tax payer to penalty relief and partial interest relief; and the Limited Relief Program which applies to acts of non-compliance that involve intentional conduct or for corporations with gross revenue exceeding $250 million dollars, entitling tax payers under this category with reduced relief.xiv While the general program provides a penalty-free protection, the limited program does not.xv Furthermore, the general program is still considered better because applying under the limited scheme means that a tax payer has waived the right to file the Notice of Objection to the Appeal Division of the CRA and the rights to appeal to the Tax Court of Canada unless there are calculation errors or other issues asides those disclosed under the VDP.xvi
The VDP has a wider range of taxes as it is not streamlined to indirect taxes, but covers; excise duties under the Excise Act, 2001, source deductions, charges stipulated under the Softwood Lumber Products Export Charge Act 2006 and Air Travellers Security Charge Act and excise tax and GST/HST under the Excise Tax Act.xvii Hence, both direct and indirect taxes are covered.xviii However, the reliefs under the program apply to tax liabilities due within 10 years before the application.xix
To make a successful application, the application must be; voluntary, complete, involve a potential application for a penalty, include information that is at least one year past due and include payment of the estimated tax owed.xx The VDP has guiding principles to check the abuse of discretion by the Minister. The most striking of these principles is that of procedural fairness which mandates that a decision be made in good faith and in a manner consistent with the objects of the ITA.xxi Where the discretion has not been exercised properly, the tax payer has a right of second administrative review and eventually, judicial review.xxii
The Canadian VDP appears to be wider in scope than the Malaysian VA in terms of taxes covered and its application to intentional conducts
Both the Canadian VDP and Malaysian VS are similar in terms of the relief provided. However, the Canadian VDP is distinguished from the Malaysian VA because it is wider in scope, to cover both direct and indirect taxes. Unlike the Malaysian program which applies to indirect taxes. Whilst the effectiveness of the Malaysian VA may be subject to forms of tests based on its streamlined nature, it must be established that the area covered by the VA are areas identified by the government to be characterized with large revenue losses. VDP/VDS is not a net to be casted with no strategic targets, hence the Malaysian position can be justified. The point can also be made that the Malaysian scheme covers more years of default than that of Canada which only covers liabilities incurred within 10 years before the application.xxiii The Malaysian scheme has no such cap on timing, as long as the liability was incurred before 31st October 2021.
Another ground for distinction is that the Canadian VDP attempts to salvage non-compliance arising from an intentional conduct. This does not mean that VDPs are tools to reward non-compliance. But from the rational of tax revenue generation which guides VDPs, the essence of the scheme is to re-integrate defaulting tax payers into the tax system with little or no sanctions. On this ground, the Canadian system can be justified. Moreover, the limited program does not capture all acts of intentional conduct, especially those which are gross.
The last ground for distinction is with respect to the relief provided. Under both schemes, as earlier mentioned, remission and penalties are common. However, there are no provisions to pay interests due under the Malaysian scheme. This makes the Malaysian scheme even more favourable as the liability is lesser.
Pro tax tips from our knowledgeable Canadian tax lawyers
- VDP is not a reward for non-compliance. VDPs only serve as the right tool to make the payment of taxes a favourable endeavour for both the government and the tax payers.
- Ensure to make timely applications under the Canadian VDP and do so with professional help from our knowledgeable Canadian tax lawyers. Once CRA commences a tax audit it is usually too late to submit a voluntary disclosure application.
- Subsequently, make the necessary disclosures to the tax authority as the current VDP only covers non-compliance for within 10 years before the application and not future acts of non-compliance.
Frequently Asked Questions (FAQs):
Question: For the past few years, I have traded in cryptocurrencies and non-fungible tokens without disclosing my gains on my Canadian income tax forms. Can the Canadian VDP be of help to me?
Answer: The Canadian Voluntary Disclosures Program covers such non-disclosures and you are eligible for the program. Upon application and approval by the Canada Revenue Agency, you will have any form of criminal prosecution forgone and fines for gross negligence forgiven. You may even pay less interests.
For more information, see our article discussing the implication of the VDP on undisclosed crypto and NFT trades: An experienced Canadian tax lawyer provides the following advice: Voluntary Disclosures Program (VDP) for Unreported Cryptocurrency Income and Protecting Your Constitutional Rights
Question: I have intentionally used cryptocurrencies and non-fungible tokens to conceal my income in a manner which can be described as money-laundering. Since the CRA can track these transactions and prosecute me, can I use the VDP to avoid criminal prosecution for an intentional act?
Answer: Upon meeting the necessary requirements in para 28 of the CRA Information Circular, you will also be entitled to relief for an intentional act of non-disclosure in Canada. The same is not applicable in Malaysia. Upon receipt of your voluntary application, the CRA will investigate your disclosed non-compliance and reach a verdict on your eligibility and reliefs entitled to. However, Your VDP application can be particularly time-sensitive, so secure an appointment for a professional, confidential consultation with one of our knowledgeable Canadian tax lawyers right away.
iDora Benedek, ‘Voluntary Disclosure Programs — Design, Principles, and Implementation Considerations’ (International Monetary Fund, 2022) IMF Technical Notes and Manuals 002, p 5 <https://www.imf.org/en/Publications/TNM/Issues/2022/04/06/Voluntary-Disclosure-Programs-Design-Principles-and-Implementation-Considerations-516211>
iv Ibid at 7.
v Eric Le Borgne and Katherine Baer, ‘Tax Amnesties: Theory, Trends, and Some Alternatives’ (International Monetary Fund, 29 July 2008) <https://www.imf.org/en/Publications/IMF-Special-Issues/Issues/2016/12/31/Tax-Amnesties-Theory-Trends-and-Some-Alternatives-21865>
vi Benedek (n 1) at 7
vii KPMG, ‘Indirect Tax Voluntary Disclosure and Amnesty Programme (VA)’ (2021) <https://assets.kpmg/content/dam/kpmg/my/pdf/key-snapshots-and-guidance.pdf>
viii KPMG Malaysia, ‘Summary of the Guideline on Voluntary Disclosure and Amnesty Programme (“VA”) – Indirect Taxes’ (KPMG, 3 January 29229 <https://assets.kpmg/content/dam/kpmg/my/pdf/taxwhiz-summary-guideline-va-programme.pdf>
ix Royal Malaysian Customs Department (RMCD), ‘Guideline: Voluntary Disclosure and Amnesty Programme - Indirect Taxes’ (2021) para 1.4<http://www.mysst.customs.gov.my/assets/document/Annoucement/GUIDELINE%20VA%20PROGRAM_20211231_merged.pdf>
x Ibid at para 4.
xi Ibid at para 3.1.
xii Benedek (n 1) at 7
xiii Canada Revenue Authority (CRA), ‘Information Circular IC00-1R6 - Voluntary Disclosures Program’ (2018) <https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic00-1/ic00-1r6-voluntary-disclosures-program.html#toc0>
xiv CRA Information Circular IC00-1R6, para 6
xvi CRA Information Circular IC00-1R6, para 66; TaxPage, “CRA Voluntary Disclosure Program” (2018) <https://taxpage.com/voluntary-disclosure/>
xviii Voluntary Disclosure Program – Guidance from A Canadian Tax Lawyer’ (Barrett Tax Law, 20 September 2021) < https://www.mondaq.com/canada/tax-authorities/1112798/voluntary-disclosure-program-guidance-from-a-canadian-tax-lawyer->
xix CRA Information Circular IC00-1R6, paras 17 and 18
xx CRA Information Circular IC00-1R6, para 28
xxi CRA Information Circular IC00-1R6, para 11
xxii CRA Information Circular IC00-1R6, paras 59 - 64
xxiii CRA Information Circular IC00-1R6, paras 17 and 18
"These articles provide information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."